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Bill Schmarzo

It’s Not Digital Transformation; It’s Digital “Business” Transformation! – Part I

Because you can’t do anything halfway, you’ve got to go  all the way in anything you do.”

– Jerry Bruckheimer

It’s disturbing that McKinsey’s recent research (see the article “Why Digital Strategies Fail”) found that only 8 percent of companies said their current business model would remain economically viable if their industry keeps digitizingat its current course and speed.

“…at its current course and speed?”

You wish!

In fact, any reasonable executive should expect that the course and speed of digitalization will accelerate as new digital capabilities, new data sources, and advanced analytics (e.g., data mining, machine learning, deep learning, artificial intelligence) provide more opportunities to disrupt traditional business models.

For those business executives ready to see where and how to begin the journey, I laid out the scope and framework in the blog “Introducing the Customer Journey Digital Transformation Workbook.”   Plus, recent work with the University of San Francisco and the National University of Ireland Galway provided the catalyst for refining the Digital Transformation exercise, driven by the interaction between what I was thinking and what the students came up with, in uncovering two fundamental digital transformation concepts:

  • Fundamental #1: Identifying Sources of Value Creation. Identifying the sources of value creation is customer-centric perspective (think “outside-in”) that focuses on identifying, validating, valuing and prioritizing the sources of customer (and market) value creation.  To accomplish Fundamental #1, we will leverage a Design Thinking technique called Customer Journey Mapping.
  • Fundamental #2: Identifying Engines of Value Capture.  Identifying the engines of value capture is a production-centric perspective (think “inside-out”) that focuses on identifying and prioritizing the organizational capabilities or functions necessary to capture the sources of value creation.  To accomplish Fundamental #2, we will leverage old school Michael Porter’s Value Chain Analysis.

Before diving into these two foundational concepts, let’s first establish a common lexicon.

What is Digital Transformation?

I created the Digital Transformation definition below (source: “What is Digital Transformation?”) to frame the digital transformation conversation.  While it’s not perfect, it at least puts everyone on the same page.

Digital Transformation is application of digital capabilities to processes, products, and assets to improve efficiency, enhance customer value, manage risk, and uncover new monetization opportunities.

But equally important is to understand what Digital Transformation is NOT. Digital Transformation is NOT:

  •     Agile App Development
  •     Cloud
  •     Big Data
  •     Machine Learning or Deep Learning
  •     Internet of Things
  •     Virtual Desktops
  •     Mobile Devices

Digital Transformation is about your organization’s business models, and how your organization can leverage new digital assets (data, analytics and apps) to create and capture sources of customer and operational value.

“Digital Transformation is about value creation and capture!”

Fundamental #1:  Identifying Sources of Value Creation

Determining which tasks or activities have the highest perceived value to the customer requires organizations to gain an intimate understanding as to why a customer engages with your organization; that is, to understand the customer “event” and what role your organization plays in the successful completion of that event.

What is an “event”?

For an end consumer, an event could include buying a house, planning a vacation, taking a trip, having surgery or taking a vacation.  For a business customer, an event could include running a marketing campaign, developing a new product, creating a partner relationship or expanding into a new market.

Homework Assignment #1:  Document the “events” that your customers are trying to complete by engaging with your organization.

To identify the sources of value creation, we want to map the customer activities and tasks that comprise a customer event from “Epiphany” (when the customer first becomes aware that they want to undertake this event) through “Execution” to the final stage of “Expiration” (when all activities and emotions associated with the event are completed).  To do this, we will leverage the Customer Journey Mapping concept (see Figure 1).

Figure 1: Using Customer Journey Mapping to Identify Sources of Value Creation

The customer journey mapping captures the “Why” the customer is engaging with your organization. As you create your customer journey map it is critical that you think beyond just the four walls of your organization to understand the complete customer journey, regardless if it involves your organization or not.

Digital Transformation sweeps aside traditional industry borders to create and capture new sources of customer and operational value

Looking beyond your own four walls might surface new sources of value creation – opportunities where your organization could expand beyond current products and services to help the customer complete their journey (and provide new sources of value creation).

Measuring Customer Value and Impediments

As you create the Customer Journey Mapping, be sure to capture the following insights:

–      What tasks or activities are most valuable to customer success and represent the potential areas of highest value creation?

–      What tasks or activities are areas of frustration or impediments to customer success where the organization can seek opportunities to mitigate or eliminate?

A very useful addition to the Customer Journey Mapping is the addition of a “value line” which allows you to visualize what tasks or activities are of high value (green arrows that extend above the value line) and what tasks or activities are impediments to success (red arrows that extend below the value line) to the customer journey (see Figure 2).

Figure 2: Customer Journey Mapping Sources of Value and Frustration

In a future blog, we will explore techniques for codifying the value and costs associated with the different tasks and activities that comprise the customer journey.

Homework Assignment #2:  Identify (and rank order) the customer’s tasks or activities that represent the highest value (from the customers’ perspective) with respect completing their journey.

Homework Assignment #3:  Identify (and rank order) the customers’ tasks and activities that are the sources of frustration or impediments in completing their journey.

Fundamental #2:  Identifying Engines of Value Capture

Fundamental #2 requires organizations to identify the “What” the organization needs to do to optimize customer value capture while reducing or eliminating the customer’s impediments and frustrations.  We are going to use Michael Porter’s Value Chain Analysis technique to help us understand the organization’s sources of value capture (see Figure 3).

Figure 3: Identifying Engines for Value Capture

It is critical that organizations look through the customer “outside in” lens to make the determination as to which internal business and operational processes to invest.  Without the customer “outside in” perspective, organizations can easily default to optimizing processes that are no longer relevant or obsolete.  We call this “Paving the Cow Path.”

Michael Porter’s Value Chain Analysis is a “chain” of internal business functions, capabilities and processes.  As products and/or services pass through the functions, capabilities and processes that comprise the value chain, each activity adds some value to the end product and/or service.  To be economically viable, the internal chain of functions, capabilities and processes must yield more added-value than the sum of the value of the independent activities (see Figure 4).

Figure 4: Michael E. Porter “Competitive Strategy: Techniques for Analyzing Industries and Competitors

See the blog “Big Data MBA: Course 101A – Unit III” for more details on the Michael Porter’s Value Chain Analysis.

Customer Journey Digital Transformation Example

An IDC white paper titled “IoT and Digital Transformation: A Tale of Four Industries” states that by 2018, “33% of all industry leaders will be disrupted by digitally enabled competitors.”

How do you avoid being one of the 33%?

By focusing on 1) understanding the customer’s high value and low-value tasks and activities with respect to their journey around a specific event, and 2) identifying what internal capabilities, processes and functions need to be optimized (or innovated) with respect to the customers journey map (see the blog “Data Science Monetization: Focus on Innovation, Not Effectiveness” for more details).

For example, Rocket Mortgage has turned the mortgage industry upside down.  They invested the time to understand which customer “Getting a Mortgage” tasks and activities were the highest-value to the customer (e.g., knowing what types of homes they qualify for) and those tasks and activities that were impediments to success (e.g., filling out the endless amount of paperwork).

To quote Jay Farner, CEO of Quicken Loans (the owner of Rocket Mortgage): “The product has been a success in so many ways, including its ability to remove the intimidating and cumbersome aspects of the traditional mortgage process.” In the 4th quarter of 2017, Quicken Loans became the nation’s largest residential mortgage lender.

Customer Journey Digital Transformation Summary

Digital Transformation requires organizations to understand the sources of customer “value creation” and then map the organizations internal “value capture” functions against those sources of value creation.  That means mastering two fundamental methodologies:

  • Fundamental #1: Identifying Sources of Value Creation. Identifying the sources of value creationis customer-centric perspective (think “outside-in”) that focuses on identifying, validating, valuing and prioritizing the sources of customer (and market) value creation.  To accomplish Fundamental #1, we will leverage a Design Thinking technique called Customer Journey Mapping.
  • Fundamental #2: Identifying Engines of Value Capture.  Identifying the engines of value captureis a production-centric perspective (think “inside-out”) that focuses on identifying and prioritizing the organizational capabilities or functions necessary to capture the sources of value creation.  To accomplish Fundamental #2, we will leverage old school Michael Porter’s Value Chain Analysis.

Figure 5: Digital Transformation Value Creating Mapping

However, Figure 5 is missing the middle layer; the “How” the organization is going to create, refine, and re-use its digital assets (data, analytics and apps) to digitally transform the internal, production-centric “What” (Value Chain Analysis) layer in order to capture more of the customer-centric “Why” (Customer Journey Mapping) sources of customer value creation.

We will cover that in my next blog (so stay tuned!).

By Bill Schmarzo

Bill Schmarzo

CTO, IoT and Analytics at Hitachi Vantara (aka “Dean of Big Data”)

Bill Schmarzo, author of “Big Data: Understanding How Data Powers Big Business” and “Big Data MBA: Driving Business Strategies with Data Science”. He’s written white papers, is an avid blogger and is a frequent speaker on the use of Big Data and data science to power an organization’s key business initiatives. He is a University of San Francisco School of Management (SOM) Executive Fellow where he teaches the “Big Data MBA” course. Bill also just completed a research paper on “Determining The Economic Value of Data”. Onalytica recently ranked Bill as #4 Big Data Influencer worldwide.

Bill has over three decades of experience in data warehousing, BI and analytics. Bill authored the Vision Workshop methodology that links an organization’s strategic business initiatives with their supporting data and analytic requirements. Bill serves on the City of San Jose’s Technology Innovation Board, and on the faculties of The Data Warehouse Institute and Strata.

Previously, Bill was vice president of Analytics at Yahoo where he was responsible for the development of Yahoo’s Advertiser and Website analytics products, including the delivery of “actionable insights” through a holistic user experience. Before that, Bill oversaw the Analytic Applications business unit at Business Objects, including the development, marketing and sales of their industry-defining analytic applications.

Bill holds a Masters Business Administration from University of Iowa and a Bachelor of Science degree in Mathematics, Computer Science and Business Administration from Coe College.

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